Letting go of a caregiver is never fun. Families often make their employee a part of the family, so when it's time to let them go, it's important that everything goes as smoothly as possible. Believe it or not, there are several items families need to cover when terminating their employee. This edition of The Legal Review illustrates one such case.

The SituationA client called to inform us that she needed to let her caregiver go. Her husband got a new job in another state and they only had a week to pack up and move. Obviously both parties were scrambling to make sure everything was in order and unfortunately there was a disagreement on how much the caregiver needed to be paid on her final paycheck.

The discrepancy centered on the caregiver's vacation time. Earlier in the year, the family went on vacation for a week and paid the caregiver even though she did not work. The caregiver believed that the week of paid time off was for the employer's vacation, not hers, so she still needed to be paid for her unused vacation.

The LawWhen terminating an employee, federal law is not very restrictive. Household employers just need to make sure their caregiver receives her final paycheck by her next regularly scheduled payday. However, it gets more complicated on the state level. Some states adhere to the federal regulation, while others go as far as to mandate the family give the caregiver her final paycheck at the time of termination.

Additionally, four states (California, Connecticut, New York and Tennessee) require a written Termination Notice be given to the caregiver - and three states (North Dakota, Montana and Maine) require written notice if the caregiver requests it or it's promised in an employment contract.

It's also important to note that, generally speaking, anything in an employment contract must be followed unless it violates state, federal or municipal law. So for example, if a family promises to give their caregiver two weeks of severance, the severance must be included in the final paycheck.

The OutcomeA HomePay consultant was able to get the client to send over the employment contract they had with their caregiver. It indicated that the caregiver's vacation would accrue throughout the year and part of it would be used in conjunction with the employer's annual family vacation. Because the family already paid the caregiver for a week of vacation, there was no remaining unused, accrued vacation that needed to be paid out at termination. In fact, the caregiver had only accrued 3 days of vacation for the year at the time the family gave her notice of her termination, so she had actually earned more money by having 5 paid days of vacation given to her already.

We were able to calculate what the caregiver's final paycheck would be. Additionally, to keep the client compliant with state laws, we advised her to pay the caregiver via personal check on her last day of work. We also suggested the client follow up with their caregiver at the end of the year to make sure her email or mailing address didn't change. This way, she could ensure her caregiver receives her Form W-2 for tax filing purposes.

This case illustrates why household employment is so much more than just calculating payroll. Families are often not prepared to adequately deal with HR issues like termination. It's an emotional time for both family and caregiver and being unsure of state and federal law can make for an ugly situation very quickly.

That's why a specialized service like HomePay is vital. We have more than 20 years of experience in all facets of household employment, so we're always prepared to walk families through exactly what they need to do to be compliant - while keeping their caregiver happy and their lives less stressful.

For most families that hire a nanny or senior caregiver, the best tax break available is a Dependent Care Account (also known as a Flexible Spending Account or FSA). When fully optimized, this tax break generally saves families more than $2,000 per year. This significant tax savings is an important variable to look at - especially when setting a budget for childcare - as you'll see in the following real-life scenario:

The SituationAfter maternity leave, a new mother of twins was exploring the cost effectiveness of two options: going back to work and hiring a nanny versus one of the spouses staying at home with the children. She and her husband tried to crunch the numbers, but being new parents with no experience hiring a household employee, they were unsure if the budget they came up with would be accurate for the options they were considering.

The family spoke to a local nanny agency who suggested they call HomePay for advice. The placement counselor mentioned there were tax breaks available - specifically an FSA - and we could help them create a realistic budget for their needs.

The LawA Dependent Care Account is a reimbursement FSA offered by most medium to large employers as part of a benefits package for its employees. This tax break is not income restricted nor is it subject to the Alternative Minimum Tax (AMT) that affects many families in higher tax brackets. However, in order to capitalize on this tax break, both spouses must pass the "work-related test" - which simply means both spouses have to be employed or full-time students.

Up to $5,000 can be placed in a Dependent Care Account to use pre-tax dollars to pay for eligible dependent care expenses. These include wages paid to a nanny or senior care worker as long as the person receiving care can be claimed as a dependent. This is separate from a health FSA - another commonly-offered FSA - which is used to pay for healthcare-related expenses.

Most companies only allow employees to sign up for an FSA during Open Enrollment (typically in the fall), however, there are several "life-changing events" that can allow someone to sign up mid-year. A "life-changing event" can be the birth of a child, a change in jobs or even a significant increase in care expenses. Companies have latitude on their enrollment policies, so we advise families to talk to their HR department if they wish to sign up for an FSA outside of the Open Enrollment process.

The OutcomeThe family took the agency's advice and called HomePay. A consultant explained how a Dependent Care Account works and ran through several payroll scenarios, which ultimately led the family to decide on hiring a nanny - and they chose to place through the agency that referred them to HomePay. One of the deciding factors was outlining that the family could save approximately $2,400 in total tax breaks, which would offset most of their employer taxes.

This story is a good reminder that most families struggle to understand all the complex factors that go into childcare decisions. Some sound guidance from a nanny placement professional led to a more informed decision about in-home care and, ultimately, a level of trust that yielded a new client relationship for the agency.

Had this placement counselor not mentioned dependent care tax breaks as a form of savings, the family may not have hired a nanny at all. The counselor didn't need to be a tax expert - just knowledgeable enough to know an FSA exists and where to point the family for help. Most families will not know they can enroll in an FSA when they hire a nanny, so it's a powerful nugget of information to have at your disposal. Once families run the numbers, most come to the pleasant realization that it's not nearly as expensive as they think.

This article was written by Tom Breedlove and originally published by CPA Practice Advisor on July 24, 2015.

When a family decides to hire someone to work in their home, they’re frequently doing so for the first time. Whether they’ve just had their first child and need a nanny or they’re hiring someone to take care of an elderly or disabled loved one, the vast majority of Americans have a very limited understanding of their responsibilities as a household employer. If you’re advising a client who’s hiring a domestic worker in the coming months, here are a few of the latest topics in the industry you’ll want to hit on.

Worker Classification

The most common mistake families make when handling taxes for a household employee is treating the worker as an independent contractor. Although the IRS test to determine worker status is somewhat vague, your families should be aware that, in the vast majority of cases, they’ve ruled that domestic workers should classify as employees, not independent contractors. There’s always been risk associated with providing a Form 1099 (instead of a Form W-2), but more than ever this practice is being monitored. Nineteen states were awarded grants by the Department of Labor last year to increase enforcement efforts and the household employment industry has been cited as a prime target.

Minimum Wage

As you’ve probably seen in the news, there’s a growing movement nationwide to increase minimum wage at the federal level. While this hasn’t resulted in a change to the current $7.25 per hour rate, several states and municipalities have approved hourly rates higher than the federal mandate. In fact, nearly half the states in the country increased their minimum wage in 2015, so it’s important for your clients to know the current rate in their area to keep from underpaying their employee.

Overtime

Domestic workers are considered “non-exempt” and, therefore, are protected under the Fair Labor Standards Act (FLSA). Additionally, a growing number of states have passed Domestic Worker Bill of Rights laws – heightening awareness among workers of their right to time-and-a-half for all hours over 40 in a 7-day work week. Some states also have special overtime provisions for live-in workers or more than 8 hours in a day.

Health Insurance

The Affordable Care Act is still a hot topic in the tax community – even though most of the provisions have been with us for more than a year. Families often get confused because they know many businesses have to provide health insurance for their employees. However, household employers are exempt from this mandate because they are under the 50-employee threshold.

That doesn’t mean the employee can go without health insurance though. There’s still an individual mandate in place, so the employee needs to make sure she’s covered so she doesn’t have to pay a fine. The health insurance Marketplace at www.healthcare.gov is a good place for workers to purchase a policy – plus they’ll probably qualify for a federal subsidy to lower the cost of the premium. However, to take advantage of the subsidy, workers need to have documented wages, which means employers – your clients – will need to provide Form W-2. Recently, this has been a key driver of compliance in the household employment industry. Many families have found themselves scrambling to catch up on payroll in order to get their worker the paperwork necessary for the subsidy.

Mileage Reimbursement

Most states don’t require families to reimburse their household employee for miles driven while on the job. But it’s a nice non-taxable benefit to provide if the employee has to run errands, take the kids on outings or shuttle grandma to doctor’s appointments in her car. The IRS increased the mileage reimbursement rate to 57.5 cents per mile this year. It covers the cost of gas plus general wear and tear on the employee’s vehicle. Remember, this reimbursement rate covers only miles driven while on the job; any payment for miles driven while commuting to and from the worksite would be considered taxable wages.

It may seem odd speaking to clients about tax-related matters during middle of the year, but household employment is a different animal compared to handling personal income taxes. It’s very important to make sure the employee’s payroll and your clients’ expectations for federal and state employment taxes are established during the hiring process. Mistakes in this area of the tax code are not easily remedied in January – and cause significant headaches to fix for the family and for you.

If you find yourself looking for additional resources, there is a state-by-state breakdown (http://www.myhomepay.com/Answers/RequirementsByState) of all household employment payroll and tax rules on our website. And if you’re having difficulties addressing this subject with your clients, we’re happy to send our household employment packet – a simple set of forms and helpful guidance that makes timely compliance easy for your clients.

Most Americans have some form of paid sick time through their employer, but this benefit has largely been excluded from those guaranteed to household employees. Not because families don’t provide it – because many do – but rather because federal, state and local laws don’t typically address household employment.

Well now that has changed in California. Effective July 1, 2015, household employers in California are required to provide at least 3 days (24 hours) of paid sick time each year to their employee as long as they work at least 30 days during the year. Here are a few of the other details families need to know:

• Sick time accrues at 1 hour for every 30 hours worked and can roll over to the next year. • Families can cap sick time accruals to 48 hours per year• Any unused sick time does not have to be paid out if the employee is terminated• Employees can begin using their sick time 90 days after they begin working

Since household employees are regularly interacting with children and seniors, this helps ensure a family’s caregiver won’t feel the need to show up to work with a cold that could be transmitted to a loved one. We recommend families keep a spreadsheet to track their employee’s sick time so any chances of a misunderstanding relating to how much sick time has been used are at a minimum.

NOTE: Household employers in Oakland and San Francisco already have paid sick time requirements that require them to provide up to 40 hours of paid sick time to their employees every calendar year.

As with all new legislation, questions are bound to come up. If you have any concerns about how to handle sick time for your household employee, just give us a call. We’re here to help!

When families hire a caregiver, their tax-related questions usually center on how much they'll have to pay and how much they'll withhold from their employee. That logic works fine generally in the commercial payroll world, but household employment has a few extra nuances, which is why speaking to a specialist is so important during the hiring process. With the prevalence of nannyshares and part-time caregivers, the following scenario could easily happen to one of your clients.

The SituationThe Clark and Stevenson families set up a nannyshare to make in-home care more affordable. They each paid the nanny $26,000 per year, meaning her total annual income was $52,000. Both families understood they were separate employers and asked the nanny to complete Form W-4 for each of them so they could withhold income taxes from her payroll. The nanny was used to being paid legally, so she had no problem filling out the W-4. Payroll ran smoothly with the nanny and both families - until tax season this year.

When the nanny went online to file her personal income tax return, she entered both of the W-2s provided to her by the Clark and Stevenson families. She was expecting a small refund, but was shocked to see she owed an additional $1,800 to the IRS. The nanny approached both families frustrated, and accused them of not accurately calculating her tax withholdings. To make things right, she wanted the families to cover the additional taxes she owed.

The LawHousehold employers are not explicitly required to withhold income taxes from their employee. However, most employers do to keep the employee from having to budget for the taxes on their own. To withhold federal income taxes, employees must fill out Form W-4 and provide it to their employer.

In most circumstances, employees only complete the Personal Allowances Worksheet in order to calculate the allowances they will choose, as the other worksheets are typically only completed if the employee has a complex income tax situation. The employer should withhold the employee's income taxes based on how they complete the form. They are not responsible for making sure the employee chooses the appropriate withholding election for their situation.

Note: The requirement to withhold state income taxes is the same. If an employer lives in a state with income taxes, the employee fills out a state withholding form and the employer withholds state income taxes based on their elections.

The OutcomeNeither family understood how their nanny's tax issues could have occurred. To help reach a solution, the nanny told the families to call HomePay because we had handled her payroll for a past employer with no problems. The Clark family called and one of our Consultants explained that since they were in a nannyshare and the total wages paid to their nanny were more than $50,000, she should not have used the basic Personal Allowances Worksheet on the W-4.

Instead, she should have used the Two-Earners / Multiple Jobs Worksheet. Because of this technicality, both families withheld her federal income taxes based on a $26,000 tax bracket instead of a $52,000 tax bracket.

As you can see, the difference in income taxes between the two scenarios is a little more than $2,000. The Consultant explained that the tax bill of about $1,800 was indeed accurate and the responsibility of the nanny to pay. However, since both families loved the work the nanny was doing and no one really knew what they had done was incorrect, they agreed to split the cost 3 ways. Both families also signed up as HomePay clients to make sure something like this never happened again.

A consultation like the one the Clark family received is something we recommend for all families to take advantage of. Unlike commercial payroll companies, HomePay experts can tailor payroll and tax advice to families in nannyshares or those with part-time caregivers who may have an additional job(s) on the side. This attention to detail keeps families and caregivers from having unpleasant conversations during tax season. Please let us know if we can ever assist one of your clients. We're here to ensure that they have an excellent employment experience - from paydays to tax time and all points in between.

On June 17, 2015, Oregon governor Kate Brown signed the Domestic Workers’ Protection Act into law – making the state the fifth to adopt a “Domestic Worker Bill of Rights” after New York, Hawaii, California and Massachusetts. The law goes into effect January 1, 2016 and covers most household employees. If you live in Oregon, be prepared to comply with the following new regulations:

- Household employees must be given 24 consecutive hours off each workweek. If they must work on their day off, they have to be paid overtime for every hour they work that day- If the employee averaged 30 hours per week in the previous year, they are entitled to 3 paid days off each year- Live-in household employees must be paid overtime for all hours worked over 44 in a workweek. Additionally, they must be given 8 consecutive hours off each day and adequate sleeping arrangements- Household employees are now formally protected under state sexual harassment laws as well as harassment based on gender, race, national origin, religion, disability or sexual orientation

If you have any questions about how this new law will affect you or your household employee, please reach out to us at (888) 273-3356. It’s important to understand any changes to your employment relationship before the Domestic Workers’ Protection Act goes into effect.

When families make the decision to hire a household employee, many needs and wants are considered. Sometimes, the optimal solution is to hire a live-in employee. (A live-in employment arrangement is defined as a situation where the employee lives on the premises at least 5 full days per week or 120 hours per week).

However, families need to be aware that live-in employment arrangements come with specialized labor laws and payroll rules. Without the aid of a specialized tax expert, small mistakes/oversights can snowball into a huge mess.

The SituationA family called HomePay earlier this year asking for help. They had been paying a live-in employee since mid-2014 and reported all of her wages like they were supposed to do. However, their employee was threatening to file a wage dispute saying she was underpaid.

The family explained they had been paying their employee $200 per week, plus furnishing meals and lodging, for 40 hours of work. They did not have anything in writing in regards to the value of meals and lodging, so their employee was complaining she wasn't being paid minimum wage.

The LawFederal minimum wage is $7.25 per hour, but some states set higher minimum wage rates. At the federal level, meals and lodging can be either a tax-free benefit OR count toward minimum wage for a live-in employee. It cannot be both.

If providing meals and lodging benefits the employer and is a condition of employment, it is a tax-free benefit. If the employee voluntarily lives with the employer and chooses meals and lodging instead of additional wages, the value can be counted towards minimum wage and is considered taxable. Regardless of which situation applies, employers should always include any meals and lodging deduction in their employee's contract to show it has been agreed upon by all parties.

Note: Each state is different in terms of whether the value of meals and lodging for state unemployment taxes and state income taxes (if applicable) is taxable, and the amount - if any - an employer is able to credit against minimum wage. Our HomePay consultants always have up-to-date information for all 50 states (and Washington, D.C.) should this issue arise for one of our clients.

The OutcomeSince the family did not have their employee's consent to deduct meals and lodging from her wages, we recommended they pay her an additional lump sum to at least bring her total for 2014 to minimum wage. The family agreed and ultimately signed up for our service so we could help them correct this payroll issue. Unfortunately, the family ended up having to cover both halves of Social Security & Medicare (FICA) taxes on the additional wages they paid their employee. This, along with the extra wages paid to the employee, made for a $3,000 payroll and tax mistake. Since we were able to help the family straighten out their payroll issues with their employee, she did not proceed with the wage dispute.

Disputes over the value of meals and lodging are not very common because the majority of families will pay a live-in employee more than minimum wage. However, the broader lesson is that a free phone consultation with a HomePay expert - during the hiring process - helps prevent expensive and frustrating problems. Whether it's navigating a common topic like overtime or a complicated payroll scenario like this one, understanding all the federal and state tax and labor law gives families and their caregivers peace of mind and, ultimately, a better financial relationship.

Workers' compensation insurance is a unique part of the household employment hiring checklist. It's not tied to the payroll and tax process, but can have a dramatic impact on a family's finances. The following incident is a prime example of why families need to inquire about workers' compensation before their household employee starts her first day of work.

The SituationA family in Tennessee hired a nanny to take care of their 2 kids. The family lived near the park in their neighborhood, so it was part of the nanny's daily routine to take the kids there and let them have some play time outdoors. Unfortunately, only 3 weeks into the job, the nanny hurt herself while playing with one of the kids and was unable to walk back to the family's home. She was able to call the mother who quickly drove to the park, picked up the nanny and the kids and took the nanny to the emergency room.

The nanny's doctor informed her that it would be unsafe for her to care for the family's children for 3 weeks while she recovered. Between the emergency room visit, x-ray, MRI, arthroscopic surgery and 12 recommended rehabilitation sessions, the total cost of her care came to approximately $8,800. To make matters worse, the hospital informed the nanny that her insurance company refused to pay for her treatment because it was a work-related injury. The nanny and the family were both confused about what to do.

The LawThe majority of states require household employers to purchase a workers' compensation policy to assist their employee with medical bills and lost wages if they are sick or injured on the job. Even if workers' compensation isn't required in a family's state, they can still be held liable for the value of their employee's lost wages and medical bills in a work-related incident. Many families mistakenly believe their homeowner's insurance umbrella policy is sufficient for coverage. However, these policies are written for "guest workers" (i.e. a painter or plumber doing a short-term project) and do not cover an in-home employee.

Note: In California, a homeowner's insurance policy will cover a household employee provided they work 20 hours or less. If the employee works more than this, a rider must be purchased to provide adequate coverage.

The OutcomeSince Tennessee is not a state that requires household employers to have workers' compensation for a nanny, the family didn't break any employment laws. However, since the nanny's insurance company refused to pay for her medical bills, the family was stuck with the $8,800 bill - plus another $1,800 to pay their nanny for the 3 weeks of work she had to miss. In order to save a little money when their nanny was recovering, both parents used vacation time from their own job to watch their kids until their nanny returned to work. The family now has a workers' compensation policy - which costs them a little under $500 a year to protect them in case another accident occurs.

This case illustrates why it's a good idea for families to purchase workers' compensation, even it's not required by their state. This family unfortunately made a $9,000 mistake - largely because they weren't informed about workers' compensation during the hiring process. Had they received a thorough consultation from an expert like HomePay, we could have eliminated this risk. You can easily imagine a scenario where a household employee is injured on the job worse than this family's nanny. The resulting medical bills could be 2 or 3 times more expensive, which could cripple a family's finances.

This is why all families that come to our service have streamlined access to a workers' compensation solution during the HomePay setup process. In fact, almost all of our clients can receive a policy through our licensed insurance partner. We don't upcharge or make any money on these policies - it's just an added convenience for our clients so they can stay compliant in all aspects of household employment.

When families hire a household employee for the first time and decide to handle employment responsibilities themselves, they are required to take on management of multiple disciplines (payroll, employment taxes and labor law/HR) at the federal, state and local levels – a complex morass of obligations that few have the aptitude or appetite to handle. With diligence, it can be done. Without it, however, oversights and omissions are commonplace. Unfortunately, even the tiniest of mistakes can result in a mess – as you’ll see in the following case study:

The IssueA family hired their first nanny in early 2013 and decided to handle the household employment tax and payroll process on their own. In June 2013, the nanny was terminated because she wasn’t a good fit and a new nanny was hired a month later. The family reported all of the wages paid to both employees and filed their federal and state tax returns on time.

In April 2014, the family received a notice from their state’s Department of Labor that they owed an additional amount of unemployment insurance taxes for the first quarter of 2014. After another review of their mail from the state, they noticed that one of the letters they received in July 2013 indicated that the first nanny had filed for unemployment benefits. After thorough re-reads of other letters, they found a notice that their unemployment tax rate had changed.

The LawIn most states, unemployment insurance taxes are required to be paid and filed quarterly. New employers are assessed a standard rate for their first year and for years after, they are assigned an experience rate. The experience rate can increase for many reasons, but the most common are when the employer files a late tax return or a former employee receives unemployment benefits.

Additionally, employers that underpay their state unemployment insurance taxes are not eligible for the federal unemployment insurance tax credit. Federal unemployment insurance taxes are assessed at 6% on the first $7,000 of gross wages paid to the employee. However, when employers pay their full share of state unemployment insurance taxes, their federal unemployment insurance tax rate can be reduced by as much as 5.4%.

The OutcomeThe family did not fully understand what the Department of Labor notices meant, but after spending several hours talking to representatives with the state tax agency, it became clear that their first nanny filed for, and was granted, unemployment benefits since they did not dispute the claim. As a result, the family’s experience rate was increased.

Since they did not realize this, the family had inadvertently miscalculated their state unemployment insurance taxes for the first quarter of 2014, which resulted in underpayment problems. The family had to amend their quarterly employment tax return and pay the additional taxes, plus penalties and interest. This amounted to roughly a $250 mistake – plus the time lost talking to the state.

When it comes to household employment obligations, this is a great illustration of the old adage “the devil is in the details.” This family was 99% compliant with their tax and payroll responsibilities, but neglected a couple of lengthy state notices and had a tax mess on their hands. As part of the HomePay service, we establish ourselves as the agent and mailing address for the state so our clients don’t have to worry about missing important notices like this. Anything that impacts their employee’s payroll or their taxes is communicated with them and adjusted on our end so they never have to question whether their state tax returns will be accurate. And our staff is always on hand to answer any follow-up questions that stem from these notices – or anything related to their payroll and tax needs.

Hiring someone to care for your child is an expensive undertaking. While the price continues to increase year after year, the tax breaks families are able to take advantage of for paying legally haven’t increased in a very long time. Specifically, the expense limit for a Dependent Care Account (FSA) hasn’t increased since 1986 and the expense limit for the Child and Dependent Care Tax Credit hasn’t gone up since 2003.

However, a bill was recently introduced in Congress to increase the Child and Dependent Care Tax Credit in order to make childcare a little more affordable. This bill is in its infancy and there is no way to tell yet if it stands a chance of passing, but it’s important for families to know that Congress is paying attention to one of the key things that ties up a family’s budget. We’ve long advocated for measures that help families with their childcare needs and will keep you updated with the latest information regarding this new bill.

As always, if you need help figuring out your tax breaks, use our Budget Calculator or give us a call. We’re here to help!